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LivaNova PLC (NASDAQ: LIVN) Third Quarter 2021 Earnings Conference Call, November 3, 2021, 8 AM Eastern Time
Hello, ladies and gentlemen, and welcome to LivaNova PLC's 2021 third quarter earnings conference call. My name is Lydia, and I am your operator today. As a reminder, this conference call is being recorded.
I would now like to introduce the moderator of today's meeting, Mr. Matthew Dodds. Senior Vice President of Corporate Development at LivaNova. Please go ahead, sir.
Matthew Dodds - Senior Vice President of Corporate Development
Thank you, Lydia. Welcome to our conference call and webcast to discuss LivaNova's financial results for the third quarter of 2021. Joining me in today’s conference call are our CEO Damien McDonald; Alex Shvartsburg, our CFO; and our senior director of investor relations Lindsey Little.
Before we begin, I want to remind you that the discussions during this conference call will include forward-looking statements. The company's recent documents and documents submitted to the SEC discuss factors that may cause significant differences in actual results, including the press release published on our website today. We do not undertake to update any forward-looking statements.
In addition, the discussion will include certain non-GAAP financial metrics related to our performance, including but not limited to sales performance, all of which will be calculated in a fixed currency. Reconciliations with the most directly comparable GAAP financial measures can be found in today's press release available on our website.
We also published a presentation on our website summarizing the main points of today's conference call. This presentation is a supplement to other call materials and should be used as an enhanced communication tool. You can find presentations and press releases in the "Investors" section of our website under LivaNova's "News, Events and Presentations"-at investor.livanova.com.
With this, I will now forward the call to Damian.
Damian McDonald-Chief Executive Officer
Thank you, Matt. Thank you for participating in our third quarter 2021 earnings conference call.
I will first discuss our third quarter sales performance, and then review our strategic investment portfolio plans. After I leave a comment, Alex will provide you with more detailed information and more guidance on our results. Then, before proceeding with the Q&A, I will end the comment.
We are encouraged by the third-quarter results, excluding heart valves, we have experienced continuous sales growth, operating margin expansion and adjusted free cash flow generation, and at the same time spent more time under the impact of headwinds related to COVID-19. Challenging environment. Due to the impact of the pandemic on our performance last year, today’s comments will also include some comparisons with 2019. We believe this will provide a useful background for the basic trajectory of our business. In addition, some comparisons are reflected in slide 12 of our earnings presentation.
Turn to our core growth drivers, epilepsy and ACS. Compared with the third quarter of 2020, global epilepsy sales increased by 15%, and all three regions achieved double-digit growth. In addition, epilepsy sales in the quarter were in line with 2019 levels. These results reflect an improvement in global market dynamics, which is due to increased hospital access and patient willingness to return to clinics compared to the same period last year.
U.S. epilepsy sales increased by 11% compared to the third quarter of 2020, and remained at the same level as the third quarter of 2019. Compared with the previous year, the total number of implants has increased by high single digits, but it is still lower than the level of 2019. Similar to the trend in the previous quarter, the total growth of implants was driven by replacements, which continues to benefit from catching up with delayed procedures in 2020. In addition, although sales were down 3% from the previous month, mainly due to the surge in Delta variants, we saw improvement in the leading indicators of the number of patients in October. Our progress in epilepsy in the United States continues to be supported by our listing plan, which currently includes 12 dedicated teams. These teams now account for approximately 19% of US sales and implants, up from 17% of the same account in the second quarter. Compared with 2020 and the third quarter of 2019, they continue to achieve higher than the baseline business sales and implant growth trends.
Compared with the same period last year, epilepsy sales in Europe increased by 16%, led by the United Kingdom and Italy. Driven by the strong recovery in China, Taiwan and Saudi Arabia, we achieved 47% growth in the rest of the world. The overall situation in Europe and the rest of the world is consistent with the results of the third quarter of 2019. We continue to expect global epilepsy sales to grow by 25% to 30% throughout the year. Our projections include the continuous growth of new implants in the United States as patients and their caregivers return to the doctor for in-person consultation. In addition, we expect that replacement implants related to the backlog created in 2020 will continue to go smoothly, but this situation will continue until this year.
ACS’s sales for the quarter were $15 million, an increase of 23% over the third quarter of 2020 and an increase of 16% from the previous quarter. The continued adoption of LifeSPARC and the increase in the number of surgeries have driven growth, especially in the area of respiratory distress. Given our performance in the first nine months of this year, we now expect ACS to grow by more than 30% in 2021.
Now turn to DTD. Sales in the third quarter were US$2 million, and sales in the first nine months of 2021 were US$6 million. For the full year, we now expect DTD sales of approximately US$10 million for the combination of the RECOVER study and replacement implants for CMS eligible patients. Although we are still encouraged by the progress of patients who agreed to participate in the RECOVER study, the impact related to the COVID Delta variant continues-leading to some delays in implants this quarter. Due to these delays, we are now more likely to implant 250 unipolar patients in the early first quarter of 2022. In addition, since we are currently biasing towards unipolarity, we expect that the achievement of this milestone will be achieved before the bipolar cohort. As a reminder, we can submit data from unipolar and bipolar cohorts separately to transition to longitudinal studies or registration. We still expect to transition to the registry at the end of 2022 or early 2023.
In terms of heart failure, the key ANTHEM HFrEF trial continued after reaching the key milestone of enrolling 300 patients in April. Once these patients have been followed up for 9 months and the 400th patient has been recruited, independent statisticians will review the data set. If all five criteria are met, including safety, primary endpoint trends, and the success of the three functional endpoints, we may submit functional data to the FDA. If we do not meet all the criteria, independent statisticians will review the data again after the 500th patient is enrolled. We continue to expect independent statisticians to begin analyzing data in the first half of 2022.
Moving to OSA, our OSPREY trial has started, and we are activating all 20 selected sites, several of which have already screened patients. We are still expected to implant our first patient this quarter, and still assume that it will be submitted for FDA approval in the middle of 2024. For the cardiopulmonary business, sales in the quarter were $123 million, an increase of 15% compared to the third quarter of 2020. Driven by the increase in the number of cardiac operations, the sales of oxygenators in all three regions of the world have increased. Heart-lung machine sales increased by more than 25%, with growth in all three regions, especially the United States. In addition, heart-lung machine sales this quarter were 2% higher than 2019 levels.
Finally, Heart Valves was divested on June 1 this year, and Heart Valves' sales in the third quarter of 2020 were 21 million U.S. dollars.
With this, I will give it to Alex.
Alex Shvartsburg - Chief Financial Officer
Thank you, Damian. In my conference call, I will briefly review our third quarter results and provide an update on our 2021 guidance.
Sales for the quarter were $253 million, an increase of 15% from the third quarter of 2020, excluding heart valves. Sales increased by 5% compared to 2019. Cardiovascular sales were $139 million, an increase of 15% compared to the third quarter of 2020, and an increase of 9% compared to the third quarter of 2019. Neuromodulation sales were US$113 million, an increase of 15% compared to the third quarter of 2020 and the same as the third quarter of 2019.
The adjusted gross profit margin as a percentage of net sales for the quarter was 71%, higher than 67% in the third quarter of 2020 and higher than 70% in the third quarter of 2019. The increase in profitability during the two comparative periods was mainly driven by product and geographic combination. The adjusted R&D expenses in the third quarter were 37 million U.S. dollars, compared with 36 million U.S. dollars in the third quarter of 2020. R&D as a percentage of net sales was 14.8%, the same as the previous year. The adjusted SG&A expenses in the third quarter were US$93 million, compared to US$92 million in the third quarter of 2020. SG&A's percentage of net sales decreased by 36.6% from 38.2% in the third quarter of 2020.
Adjusted operating income from continuing operations was US$48 million, compared with US$32 million in the third quarter of last year. The adjusted operating margin of continuing operations was 19%, compared with 13% in the third quarter of 2020. This increase was mainly due to good sales performance and improved gross profit margin. Part of the increase in operating income margins is due to the postponement of certain operating expenses to the current quarter.
The adjusted effective tax rate for this quarter was 10.5%, compared to 4.5% in the third quarter of 2020. The higher tax rate is mainly due to the geographical income mix.
Adjusted diluted earnings per share from continuing operations for the quarter was US$0.68, compared to US$0.38 in the third quarter of 2020. After the stock issuance, the adjusted diluted weighted average outstanding shares for the quarter were 52.4 million shares.
Our cash balance as of September 30, 2021 was US$182 million, a decrease of US$71 million from the US$253 million cash balance at the end of 2020. Net debt at the end of the quarter was US$123 million, compared to US$505 million at the end of 2020. Changes in our cash balance and net debt were affected by equity issuance, and we raised $323 million in net income and $450 million in term loans. In addition, we have implemented a secured revolving credit line of US$125 million, which can be used for general corporate purposes and has not been drawn.
Our adjusted free cash flow for the third quarter of 2021 was US$40 million, and for the first nine months of 2021 it was US$52 million. We invested US$18 million in capital expenditures in the first three quarters of this year, which is US$11 million lower than comparable figures. During 2020.
Now turn to our revised 2021 guidelines. As Damian mentioned, based on our performance in the first three quarters of 2021, we are adding to our previously announced full-year guidance. We now forecast sales growth in 2021 between 8% to 11% and 15% to 18%, excluding the heart valve business. This is higher than our previous guidance of 5% to 10% and 12% to 17%, respectively. Our full-year sales growth guidance assumes a 2% tailwind from the exchange rate.
We expect adjusted diluted earnings per share from continuing operations to be between US$2 and US$2.10, higher than our previous guidance of US$1.75 to US$2.05. We assume that the adjusted diluted weighted average outstanding shares in the fourth quarter of 2021 will be 54.1 million shares, and 51.5 million shares for the full year. Adjusted operating free cash flow is now expected to be between US$55 million and US$75 million, which is higher than our previous guidance of US$50 million to US$70 million.
With this, I will turn the call back to Damian.
Damian McDonald-Chief Executive Officer
Thanks, Alex. We have built a good momentum in our diversified portfolio, and with this in mind, we have increased the scope of guidance. Although we continue to adapt to the changing market dynamics caused by the pandemic, we still focus on improving business performance and fulfilling our pipeline promises. I look forward to sharing more updates with you on the upcoming Investor Day on December 7, which will be a virtual event.
With this, Lydia, let us open the hotline for questions.
Thank you, Damian. [Operator Instructions] Our first question today comes from Rick Wise of Stifel. Rick, your line is open. please continue.
Rick Wise - Stifel - Analyst
Hi. Good morning, Damian. Hello everyone. Obviously, there are many things to unravel here, just like where we start. Let's start with Neuromod. Obviously, as you pointed out, you continue to perform another quarter of robust execution, Damien. Perhaps you can find out more about how you think COVID has affected this momentum (if any) this quarter and how the fourth quarter started. We just heard so much from so many people. With all of this, I know that the backlog helped in the last quarter-the second quarter, I guess this quarter, I think you said. where are we? As you move forward, not only in the fourth quarter, but also in this regard entering next year, what confidence do you have?
Damian McDonald-Chief Executive Officer
Well, first of all, good morning, Rick. Thank you for joining us. Yes, let me-like you said, a lot of things have to be opened. First, it is clear that Delta Airlines is still making an impact, especially the United States, Australia and Japan. A little analysis of the United States, the leading indicators of the U.S. epilepsy business in October improved significantly. I think the important thing for us is that you are right and we are gaining a tailwind from the termination of service. As a result, the total number of implants in the United States increased by high single digits, and the strongest performance was in August and September. So it has improved throughout the quarter. Similar to the past few quarters, the end-of-service recovery is faster than NPI, which has a lot to do with the catch-up of delayed procedures. As a result, the service ended up with a year-on-year growth of more than 15%. NPI growth—declined in the mid-single digits. Therefore, for us, this is an implant business opportunity at the end of the service, which is really helpful. By 2021, we expect service termination growth to exceed 20% and NPI to grow in the mid-single digits. So I will say that the situation improved in the second half of the October quarter. It will definitely help in the U.S. after the service
On the international front, I know this is a small part of the business, but we have seen very significant growth in Canada, China, Saudi Arabia, and Taiwan. All these growths are very significant, and we are very happy about it. Taiwan is very interesting because some changes have taken place in reimbursement recently, and our sales team investment has also read through, so I am very satisfied with the team's execution in other parts of the world.
Matthew Dodds - Senior Vice President of Corporate Development
Yes, Rick. It's Matt. So in the backlog, as Damian emphasized, we have 900. Remember last quarter we said that we had 1,000. So we do think we have eaten a little bit in the enrollment backlog, but only considering this number, we won't capture this in the fourth quarter. We may capture 100 or 200. So this will continue until 2022.
Rick Wise - Stifel - Analyst
Get you. Speaking of - I think it is the second big topic, the RECOVER experiment. You emphasize the delay and consider it generously. You delay until the first quarter, which seems to be a moderate delay. But can you help us be sure that it will not be worse than normal, and what is the situation-it is not fair, but I don't care, how is the monthly admission trend in the third quarter flowing? Is September the weakest? Are you beginning to see it re-accelerate and pick up, and the pace that gives you confidence-and convinces us that the first quarter will be enough to get to where you need to be in unipolar?
Damian McDonald-Chief Executive Officer
Yes, this is a good set of questions. So it is actually in the past few months that we have seen a slowdown in the implantation rate. To a large extent, the impact is related to Delta, the availability of patients, and the shortage of clinical staff at some of our clinical sites. If you look at the license, the license actually increased by nearly 25% month-on-month. So in fact-the technical steps are very positive. This is really just inserting the implant. This is why-I think the moderate delay at the beginning of the first quarter, as we described, was a moderate delay, and it did not really affect our transition to the registry. As we said, we still promise to do it at the end of 2022 and early 2023, depending on the timing of the CMS review. So this has not changed.
We are biased towards unipolarity, so unipolarity will appear earlier. Bipolar patients are more severely ill and more difficult to pass through the pipeline. This is a bit prolonged, but we are very optimistic about unipolarity.
Matthew Dodds - Senior Vice President of Corporate Development
Yes, Rick. If you look at our implant averages in August, September and October and extrapolate it to the next three months, that’s why we are still very confident that this is the first half of the first quarter of 22 .
Rick Wise - Stifel - Analyst
great. That's great. Just at the end-I will sneak into the last one. LifeSPARC obviously has a brilliant quarter, maybe it just gives us more color. To what extent is this a patient related to COVID? What percentage is COVID? If my quick math calculations are correct, I may not. Although your guidance is very good this year, it means a slowdown in the fourth quarter. Why is it slow? Is that the coronavirus? Just give us some more perspectives. Thank you very much and I am very happy to see this quarter.
Matthew Dodds - Senior Vice President of Corporate Development
Thanks, Rick. [Unidentifiable], Damian. Yes, so for COVID, in terms of surgery volume, we estimate that the third quarter is about 45%, Rick. This is a slight increase from the second quarter, which may not be a big surprise. But one thing you should consider is that when COVID and Delta got worse in the third quarter, it did have a negative impact on the business. It is more difficult to enter the hospital, which is critical to the ACS business. Therefore, COVID has pros and cons, but the percentage is 45%. And in October, we actually saw it decline.
Damian McDonald-Chief Executive Officer
Yes. In terms of growth rate alone, the competition in the fourth quarter is more difficult than the competition in the third quarter because we are increasing. So this is indeed an implied change in growth rate, but there is nothing other than continuous growth in income.
Rick Wise - Stifel - Analyst
Damian McDonald-Chief Executive Officer
Thank you. Today's next question comes from Mike Matson of Needham. Mike, your line has been opened.
Mike Matson - Needham & Company - Analyst
Yes, good morning. Thank you for answering my question. I think I will start with the heart and lung business. So you saw pretty strong growth there. I know you may have a fairly simple combination. But maybe you can comment there, the heart-lung machine and oxygenator have achieved good growth. Then, can you tell us the update time of the new heart-lung machine? Or is it consistent with what you said before?
Alex Shvartsburg - Chief Financial Officer
Hi Mike. It's Alex. Therefore, the cardiopulmonary business is actually just a function of recovery from the downturn of COVID last year. We see the strong execution and good performance of our sales team in consumables and HLM. So we feel good about this quarter. This is a good strong performance, but I think we once again benefited from last year's tailwind.
Damian McDonald-Chief Executive Officer
In terms of HLM launch. We still look forward to launching the new HLM in the second half of next year, first in Europe and then in the United States
Mike Matson - Needham & Company - Analyst
Okay, got it. Then, I thought I would ask a question about the OSA test. So can you talk about the design of the trial and the expected time for registration and submission to the FDA?
Matthew Dodds - Senior Vice President of Corporate Development
Of course, Mike. It's Matt. So our goal is to have as many as 150 patients, 2 to 1 randomization, if we assume about 18 months for follow-up, then we will follow up for 6 months. This is how we get the 2024 FDA approval timeline.
Mike Matson - Needham & Company - Analyst
Damian McDonald-Chief Executive Officer
Thank you. Today's next question comes from Adam Maeder of Piper Sandler. Adam, your line is open.
Adam Dmitry - Piper Sandler - Analyst
Hello everyone. Congratulations on the wonderful season here and thank you for your questions. Give me two. I think the first one is just about the construction of EPS guidance. Given the outstanding performance and strength we saw in the third quarter, it seems that if I do the math here, even with improved guidance, you assume that the adjusted earnings per share in the fourth quarter fell slightly. why? Is this conservatism or is there any one-off person who can appeal in the third quarter? Second, it may help us think about operating expenses next year. Obviously, you are eliminating the costs associated with heart valves, but then investing in key growth drivers such as Neuromod, ACS, and ANTHEM key trials. So maybe just touch that. Then I followed up. thanks.
Alex Shvartsburg - Chief Financial Officer
Hi Adam. It's Alex. So we are still working on the Delta variant. It continues to affect hospitals and patients' willingness to accept non-acute surgery. We also-our sales staff said there is a shortage of staff at the hospital level. So I think we are cautious in this regard. We have also seen some-we are also very cautious in terms of supply chain risks, especially in terms of the larger ticket projects we provide for HLM. This is the title of income. So from a cost point of view, I would say that shipping costs are rising. I think you heard this from most of our colleagues, and then our expenses are staged. Therefore, when we saw some of the challenges surrounding revenue trends in this quarter, we postponed some of the expenses in the third quarter to this quarter. Therefore, you will see a little bit of rebound around operating expenses in the fourth quarter. Still very satisfied with our EPS guidelines and our ability to achieve our goals here.
Adam Dmitry - Piper Sandler - Analyst
OK. Really useful color. Appreciate this, Alex. Then I think it's just another for me. You mentioned that I think the Investor Day is in the prepared comments, just hoping to get a sneak peek at the beginning of December to see what happens. Will we get the initial '22 P&L guidance? Will we get LRP updates? Does it primarily focus on improving the visibility of pipelines and pipeline plans and commercialization plans? What should we look for here in a few weeks. thank you very much.
Matthew Dodds - Senior Vice President of Corporate Development
Of course, Adam. It's Matt. Therefore, we will introduce all the main businesses and SPI. They will all be separate meetings. We will give a long-term plan. We will not focus on '22 yet, we will keep it until February, but it will be very comprehensive and build on the education series we have run in the past 12 months.
Adam Dmitry - Piper Sandler - Analyst
Sounds great, Matt. Look forward to it. thanks.
Damian McDonald-Chief Executive Officer
Our next question today comes from Anthony Petrone of Jefferies. Anthony, your line is open. You can continue your question.
Anthony Petrone - Jeffreys - Analyst
Thank you all and good morning. Hope everyone is doing well. Congratulations on your powerful prints here. A couple was on VNS, and then I had a depression. In terms of VNS, of course it is a strong traction year-to-date. You talked about the backlog here. I want to know if you can provide us with the latest information about de novo implants, especially those trends in the third quarter and how they compare to 2019 levels. We tried to do some mathematical calculations here, but we still get-we see that it is still below 2019 levels. So I just want to know how the de novo placement in VNS is popular. Then I followed up for depression.
Matthew Dodds - Senior Vice President of Corporate Development
Of course, Anthony. It's Matt. Therefore, in terms of NPI, compared with the third quarter of 2020, it has dropped by about single digits, and it has indeed fallen continuously. Compared with 2019, it is still in a downward trend, with a decline ranging from 25% to 30%. Also, similar to what you have heard from many Neuromod companies, the non-acute surgery defined by Alex has still not returned to normal. Therefore, it is not surprising that replacing [Phonetic] gets more attention than scratching it. But in general, this is still largely related to hospitals and patients' unwillingness to undergo surgery. So we said that we expect NPI to accelerate into the fourth quarter, so far, the pipeline looks good, of course by 2022. But this is an area that has not yet returned to 2019.
Anthony Petrone - Jeffreys - Analyst
Quickly follow up with the Comprehensive Epilepsy Center and how the CEC performs in this situation. Have you seen better traction and pull backlog in these locations and repositioning? Then it was really fast, and it was in the depression when it was launched in the first quarter of 22. Is there any exit method that resulted in some exits, is this risky? This again means that the patient is withdrawing, thus causing delays. Thanks again.
Damian McDonald-Chief Executive Officer
Yes, the first is to go public. Therefore, the performance of the CEC group is still better than the baseline. Compared with the third quarter of 19 in the third quarter of 21, the sales of this group increased by 20% to 30%, which was basically the same as that of 2019. So again I think this group continues to show attractiveness in this market segment. I think this is a good sign for continuing to focus on these 12 parts. We hope to expand this range in 2022. As I said, only on DTD, the amount of consent has continuously increased by nearly 25%. It just takes some time to enter the implantation cycle. I again think this is largely related to the willingness of patients to enter the clinic and the shortage of staff at some of our clinical sites.
Matthew Dodds - Senior Vice President of Corporate Development
Yes. A certain degree of dropout is expected. If you look at the public CMS agreement, that is part of the calculation. So far, our understanding is that this is not something worthy of attention.
Anthony Petrone - Jeffreys - Analyst
Our next question comes from Michael Polark from Baird. Michael, your line is open.
Michael Polark-Baird-Analyst
Hi, good morning. It's just a handful for me. Bipolar arm, can you boldly comment on when you expect the arm to reach the 150 milestone? It sounds obviously later than the first quarter of 22, but I did not hear the updated target. Sorry if I missed it.
Damian McDonald-Chief Executive Officer
No, no, I don't know if I said it, but it was somewhere in the first half.
Michael Polark-Baird-Analyst
Damian McDonald-Chief Executive Officer
When we encounter the unipolar problem, a lot of attention will be transferred to the bipolar group. As I said, they are more sick and harder to pass. Once again, with the proliferation of this Delta variant, it did change some of the trajectory there. As I said, we are more focused on overcoming unipolar problems because that is a larger patient population. Just like 65% of DTD patients. Therefore, incorporating it into the registration cycle is our top priority.
Michael Polark-Baird-Analyst
Linking the slight delay of monopolar and bipolar implants together, but maintaining the rollover to registration target at the end of next year or early 23 is-it is fair to say that embedding in your rollover to registration target later next year for 23 years or At the beginning of 23, have you considered a series of timelines to achieve-these important 250,150 milestones? I just-the problem is that you have postponed the registration time, but you have kept the importance of the registration time, I-just help me-help us better understand this-how these two updates work together.
Matthew Dodds - Senior Vice President of Corporate Development
Yes. The cushions we provide there may be the short answer.
Michael Polark-Baird-Analyst
Yes. OK. HFrEF, I don’t think this issue was discussed in this conference call or - certainly not this conference call but - or in the last conference call. MCIT seems to be on hold here and was initially considered a good catalyst for the successful reimbursement of the program in clinical practice. So, knowing that there are still clinical updates ahead of us, and I don’t want to go too far, would you like to share some higher-level comments-how do you envision reimbursement pathways for VNS and heart failure, given that the MCIT plan seems to be delayed, if not die?
Damian McDonald-Chief Executive Officer
Yes, I see-I am personally disappointed that the entire program disappears or seems to be disappearing. I-frankly, when we started the whole plan, we never incorporated this factor into our model. After we committed to the plan, MCIT appeared. So we still believe that there will be a way to start with MAC and then build data. A large part of our research is to ensure that we will generate important data-not only functional milestones, but also primary endpoints. A large part of the plan is to decompose it and conduct this embedded research. In this way, we can talk to the MAC in segments. So this is a headwind, but as I said, we did not reflect it in our initial model.
Michael Polark-Baird-Analyst
Damian McDonald-Chief Executive Officer
Our next question comes from Scott Bardo from Berenberg. Scott, your line is open. Hi Scott, your line is now open.
Scott Bardo - Berenberg Corporation - Analyst
Sorry, sorry, guys, I'm muted. Hi everyone, thank you for answering my question. Yes, the first question, please. Alex, I want to know if you can express some opinions on LivaNova's EBIT margin-this year's adjusted EBIT margin. I think if I am right, your guidance means a 14% profit margin. So I want to know if you can confirm it. Related to this, obviously, our operating costs have been reduced this quarter, and I think you are emphasizing this-a bit of a return to folding. Now that the heart valve is out of business, can you tell us the actual situation and how the operating costs might develop next year? Will they rise, stabilize, or fall below this year's operating expenses? It's just helpful in a sense.
Alex Shvartsburg - Chief Financial Officer
Scott Bardo - Berenberg Corporation - Analyst
Hey, okay, go ahead, Alex, I will come back to follow up. Thank you.
Alex Shvartsburg - Chief Financial Officer
certainly. So you are right, the profit margin, we predict it will be between 14% and 15%. That is-this is our goal. As far as our profit margins for the quarter are concerned, it is obviously somewhat inflated. We-I talked about deferring some expenses to this quarter. We saw some sales weakness earlier in the quarter, so we withdrew some investments. As you know, we usually start investing before 2022 in the second half of this year. Therefore, we studied some discretionary expenses and decided to postpone them to the fourth quarter.
Damian McDonald-Chief Executive Officer
In terms of guidance, I mean, we will do this in February, but we will give a long-term view on the investor day in a few weeks.
Scott Bardo - Berenberg Corporation - Analyst
Okay, thank you all. Maybe the second question is just, please, about VNS. Thank you for your disclosure about the approximately 5% increase in new patients. I said that the increase in new patients is indeed the best leading indicator of Neuromod's long-term growth. Am I right? I want to know if you can get an idea of how we compare to 2019 on this indicator. Are we still disappointed with the new patients in 2019? If you can quantify it or give some meaning there, that would help.
Damian McDonald-Chief Executive Officer
Yes. So we are still below 2019. I think this is what Matt is trying to show the lag of the transition as the market begins to open up. It is improving, so we have seen improvement, and we predict continuous improvement in the fourth quarter. But that is the one we are crazy about. These teams are very concerned about NPI because you are right, the long-term, long-term view of the business is related to this-those DRE patients and de novo. It will rise because depending on how you cut the model, there are 800,000 to 1.2 million DRE patients in the United States alone, and we believe that long-term growth is important to drive the business, because obviously this will lead to replacement.
Given that the average age is in the 20s, we have implanted three to four times in the patient's life. Therefore, focusing very much on NPI and focusing on pediatrics is a key aspect of a patient’s lifetime value. We also know that by influencing and implanting them earlier, there are significant benefits to their quality of life. Therefore, from the patient's perspective, we think this is a reversal in terms of their cognitive development and hospitalization [Phonetic]. Every time you are hospitalized, there will be a lot of complications. So this is our main focus.
Scott Bardo - Berenberg Corporation - Analyst
Very clear, thank you. If you can, Damien, that would be the last follow-up to Neuromod. Please correct me if I am wrong. But as far as I know, you have blocked the development of the next generation Neuromod platform Iris. I think this means that we will not have a new platform in about four or five years. I think the question is, is this important in re-accelerating the addition of new patients? Maybe then what are the plans for Neuromod's new platform? What time is it?
Damian McDonald-Chief Executive Officer
Yes. So learn more about this in the investor day a few weeks from now. It takes about three years between iterations, not five years. Our focus is more on how to consider patient connection and application development. We saw the early aspects on the original Iris, where we talked about Bluetooth. It is worth noting that when we started to focus on security and ensure that we have a truly stable platform, we took a step back. So when we did this, as I said, we turned our attention more to this patient application. We will discuss this issue more in a few weeks, but in fact I am satisfied with what I think we can do here and how we ultimately interact with patients and clinicians. But this is what we are doing, and we will discuss it in a few weeks.
Scott Bardo - Berenberg Corporation - Analyst
Damian McDonald-Chief Executive Officer
Thank you. Our last question today comes from Matt Taylor from UBS. Matt, your line is open.
Matt Taylor-UBS-Analyst
Good morning. Thank you for answering the question. I only have two, I think. I think one of them is to follow up with heart failure. I just want to know if you think you can actually be compensated by the two-year follow-up such as the 90-day short-term endpoint of the functional endpoint and the hospitalization for heart failure.
Matthew Dodds - Senior Vice President of Corporate Development
Yes. This is - this is Matt, this is our expectation. There is already a CPT code for VNS. If you look at several other competitors, they are out and are reversing. It's just not as easy as [Undecipherable].
Damian McDonald-Chief Executive Officer
Yes. But can you do this with the functional side or the main side? The answer is yes.
Matthew Dodds - Senior Vice President of Corporate Development
Matt Taylor-UBS-Analyst
OK. The COVID stuff does affect hospitalization, as we saw on the Cardio bandwidth. Do you think this will have an impact on the end year? How will you deal with it?
Matthew Dodds - Senior Vice President of Corporate Development
So the experimental design, it is an embedded experiment, as Damian mentioned. At first glance, we must hit five different endpoints. This is safe, we have a lot of data about nVNS. This is the trend of the primary endpoint of hospital mortality, not reaching it, but the trend. Then we must improve the quality of life, the six-minute walk and the left ventricular ejection fraction. If we meet all five conditions, then we can fully evaluate the data and submit it to the FDA. If we miss one of these five, or we do not get there fully, we will move on. External independent statisticians will only tell us to do it-if we recruit 100 more patients, then we can look at it again. So we did have a long runway in this test. We are going to rise-we have 1,000 patients in total. So we are not limited to a number that is about to approach. If in fact COVID has had some impact on the primary endpoints of hospitalization and mortality-the same, we don’t know, we are completely blind, but if this is the case, we still have more patients hope to be in the non-COVID period.
Matt Taylor-UBS-Analyst
understood. Okay, great, thanks for all these colors, Matt. For this, I really appreciate it. thank you all.
Damian McDonald-Chief Executive Officer
Matthew Dodds - Senior Vice President of Corporate Development
We have no other problems in the queue, so I will return Damien McDonald's concluding remarks.
Damian McDonald-Chief Executive Officer
Thanks, Lydia. And, look, thank you everyone for participating in today's conference call. On behalf of the entire team, we thank you for your support and attention to LivaNova, and we again look forward to talking with you on the Investor Day on December 7th. thanks.
Matthew Dodds - Senior Vice President of Corporate Development
Damian McDonald-Chief Executive Officer
Alex Shvartsburg - Chief Financial Officer
Rick Wise - Stifel - Analyst
Mike Matson - Needham & Company - Analyst
Adam Dmitry - Piper Sandler - Analyst
Anthony Petrone - Jeffreys - Analyst
Michael Polark-Baird-Analyst
Scott Bardo - Berenberg Corporation - Analyst
Matt Taylor-UBS-Analyst
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